JIM LEHRER: And finally tonight: another of our stories on Europe’s economic troubles.

“NewsHour” economics correspondent Paul Solman has been reporting on the consequences of the debt crisis in Greece. Well, tonight, he turns to Spain, which could face even bigger problems, following a housing boom gone bust.

The series is part of his continuing coverage on Making Sense of financial news.

SPORTSCASTER: And the winners in South Africa of the first African World Cup are Spain.

PAUL SOLMAN: Spain’s first ever World Cup win set off a riotous fiesta, lasting for days, a welcome break from what Spain’s become known for in the past year: its debt.

The world’s worry has been that Greece’s troubles could spread here. But the stakes are much higher. Spain is the ninth largest economy in the world — the ripple effects of a debt crisis here, a global deluge. So, what’s the problem and how likely is the flood?

For answers, we began at the Madrid home of old friends, journalists Jose Soler and American wife, Ana Westley (ph), together since 1968, when Spain, still a dictatorship, was dirt-poor.

WOMAN: Spain, when I first arrived here, was really Third World.

PAUL SOLMAN: Today, it’s a rich country with its own problems.

JOSE ANTONIO MARTINEZ SOLER, journalist: This is not Greece. This is not Portugal or Ireland. We had, three years ago, four years ago, five years ago, surplus. We were growing, double than any European country. Now, what happened? We have double crisis. We — in Spain, we do everything exaggerated.

(LAUGHTER)

JOSE ANTONIO MARTINEZ SOLER: European has a crisis, we have two crises. OK?

PAUL SOLMAN: In Spain, Soler explained, there was both a financial crisis and a housing crisis.

JOSE ANTONIO MARTINEZ SOLER: We built double number of houses than the average in Europe. So, now, when this financial crisis came, and the growth was down, declining, we stopped construction, and this created much unemployment. So, we have 4.5 people — million people without a job.

PAUL SOLMAN: That’s 20 percent unemployment. But Spanish government debt is just 53 percent of GDP, much lower than Greece.

JOSE ANTONIO MARTINEZ SOLER: We are no worse than the United States. Allow me to say that.

(LAUGHTER)

JOSE ANTONIO MARTINEZ SOLER: Well, but, of course, you cannot lower your deficit. Nobody will say anything to you. But we are in Europe, and we have to do everything to be in a balance with France, with Germany.

PAUL SOLMAN: To be in balance with the E.U., Spain is cutting public sector wages and freezing pensions to lower deficits and avoid default, so investors will keep lending.

JOSE ANTONIO MARTINEZ SOLER: Most of the houses they were building two years ago, they have stopped. You will see how many half-done houses are all over. It’s a big, big crisis in construction.

PAUL SOLMAN: Back towards the heart of downtown, more evidence of Spain’s real estate overhang.

JOSE ANTONIO MARTINEZ SOLER: See these four big towers? They are beautiful. And they were finished just before the crisis, so they are almost empty.

PAUL SOLMAN: Yet another example, a complex 30 miles south built during the boom by Francisco Hernando (ph), whose parents greet visitors to the project, 13,000 mostly empty apartments. Only about 3,000 were ever sold, many to speculators now trying to unload them. The few residents try to put a positive spin on things.

MAN: You go out of your apartment, it’s the country, all pure air in the country.

PAUL SOLMAN: That’s the country?

MAN: They were planning to do more apartments right there, but they stopped.

PAUL SOLMAN: Still, Spain’s got a million or so empty new housing units, their prices plummeting. That would be seven million in the U.S., adjusted for population — commercial property, just as bad.

PAUL SOLMAN: Hotel developer Raul Garcia began building Las Tablas (ph), the would-be jewel in his family’s crown of properties, in 2004. The anchor was to be a new banking complex going up next door.

RAUL VELAZQUEZ GARCIA: They stopped suddenly in 2008 because the lack of finance, even from the banks. The banks themselves, they didn’t have enough funds to rise and continue their work.

PAUL SOLMAN: The cranes on siesta augured poorly for the chic hotel, as did the credit crunch that hit Spain.

RAUL VELAZQUEZ GARCIA: We couldn’t finish it. The bank we were working with 35 years, 40 years, they didn’t give us this small part just to finish it. 2008 was very hard, a very hard year, very hard.

PAUL SOLMAN: Spanish hotel chain N.H. chipped in to finish the trendy hotel. But business isn’t exactly booming, and it’s nearly busted the once-rich Garcias. Raul’s father, Theo (ph), put all his savings back into the company. He’s now struggling to get by on a public pension.

RAUL VELAZQUEZ GARCIA: I mean, we don’t have the good life we had in the past because there is no income to the family.

PAUL SOLMAN: Despite the losses and liquidity problems, the Garcias’ hotel remains open. But with interest rates higher than when they borrowed the money, their adjustable rate loan could sink them.

In Barcelona, developer Miguel Baro owns 50 units of housing, has sold one in four years, is renting out the rest at half the cost of his mortgage.

MIGUEL BARO, real estate developer (through translator): It isn’t possible to continue like this. Under Spanish law, we can only run losses for two months. After that, we have to declare bankruptcy.

PAUL SOLMAN: How many other developers are in the same situation you are here in Spain?

PAUL SOLMAN: Thus the fear: real estate bankruptcies bankrupting the local banks. Note the for-sale signs even in Madrid’s main plaza — banks that would then be desperate for a government handout raising the vision of a bankrupt Spain.

That’s an incredibly modern house.

JOSE ESCRIVA, bank economist: I would say so.

PAUL SOLMAN: From bank economist Jose Escriva’s perch, 12 miles from Madrid, things don’t look so dire. Built in 2004 for about a million dollars, his house is down 30 percent, but he says, not to worry.

JOSE ESCRIVA: The Spanish debt is not a particularly acute problem. It’s more an issue of credibility or expectations. But…

PAUL SOLMAN: But that’s always true.

(LAUGHTER)

JOSE ESCRIVA: Yes. It also matters the amount you need to refinance over the next few months or quarters. So, when you look at the figures, you don’t get particularly concerned. You don’t.

PAUL SOLMAN: Nor does Barcelona banker Jordi Gual fret.

JORDI GUAL, banker: The Spanish economy is solvent. It can make — can repay all the debts. The public debt is not that large. The private debt is a bit bigger. Most of the debt is locally held. It’s not held abroad.

PAUL SOLMAN: Mikel Abasalo, however, is a Spanish investor running his own fund.

MIKEL ABASALO, investor: There’s no precedent in history of a country in such a position that has not defaulted. At a certain point, cajas and Spanish banks will have to recognize those losses. And my take is that government will have to step in and inject funds to — not to let the financial system to collapse.

So, to me, it doesn’t make much of a difference if the debt is owed by the real estate guy or if it’s owed already by the government. It will end up owed by the government.

PAUL SOLMAN: So, is Spain solvent or just months from collapse?

British economist and twenty-year Barcelona resident Edward Hugh:

EDWARD HUGH, economist: There’s just too much at stake for everybody, not just here in Spain, not just in Southern Europe, not just in the European Union — in the G20. I mean, everybody is going to break their necks to make sure that this kind of situation doesn’t arise soon.

PAUL SOLMAN: If not soon, many here wonder if collapse may happen eventually. And what might happen to Spain if it does? We will look at that in the last in our series on the European crisis.

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